New rules to allow for the incorporation of Registered Intermediating Brokers (RIBs) into the LME membership

The London Metal Exchange and LME Clear (together, the LME) today launched a consultation on proposed rule changes to enable the progression of their Strategic Pathway.

New contracts – a dynamic approach

To facilitate the introduction of a broader range of contracts, the LME is proposing rule changes to enable a new streamlined approach to selected contract launches where the LME sees potential future success.

As such, following the technical deployment of “dynamic instrumentation” towards the end of 2018 and in response to specific requests from market participants, the LME proposes to launch eight new cash-settled futures contracts from January 2019, to include: three regional hot-rolled coil contracts (North America, Northern Europe and FOB China); two regional aluminium premium contracts (US and European duty unpaid); alumina; cobalt and molybdenum.

Matthew Chamberlain, London Metal Exchange CEO, commented: “Dynamic instrumentation means that we will be technically able to launch products in response to market demand, at a low cost and with little administrative burden. This is not to say that we won’t continue with our usual targeted approach to selected product launches – lithium is a good example of where we are working very closely with the industry to ensure we provide the right risk management solutions for this expanding market – but it means we can now employ a variety of product development approaches to ensure continued growth across our contract offering.”

LMEprecious options

Following demand from its precious metals community, the LME aims to launch LMEprecious options towards the end of 2018. The proposed European-style options will expire into the relevant underlying monthly LMEprecious futures contracts out to 24 months forward. Closing prices will be based on submitted volatilities and will expire against the existing LMEprecious reference prices.

Electronic closing price trial

Besides setting out some proposed rule changes to support the Exchange in carrying out its three-month electronic price discovery trial for LME Nickel 3-month Closing Prices in the first quarter of 2019, the LME is also today initiating a market engagement exercise to enable members and other market participants to provide feedback on the approach to and proposed parameters of the trial.

“The trial comes as a result of views expressed by a number of users in response to last year’s Discussion Paper, who stated their preference for an electronically derived methodology for determining closing prices,” said Adrian Farnham, LME Clear CEO. “While our decision to conduct this exploratory trial in no way prejudges the LME’s view on the most effective price discovery model, we believe the trial is an essential step in gathering the data needed to take such a view. Once we have collated this data, which we aim to share with the market, we can begin to properly assess the relative effectiveness of electronic and Ring-based price discovery.”

In particular, the LME is seeking feedback on the use of a two-minute volume-weighted average price (VWAP) calculation period for the trial and on the extent of the use of trade-at-settlement (TAS) functionality prior to and during the trial.

LME Official Prices and all other LME Closing Prices except for 3-month nickel will continue to be determined on the Ring during the trial period, and once the trial is complete price discovery will revert back to the Ring. The engagement period regarding the trial parameters will close on 28 September 2018.

Registered Intermediating Broker (RIB) membership

The LME is proposing to adapt its rules to support a new category of membership – RIB – which formalises the basis on which intermediating brokers operate in the inter-office market. RIBs arrange trades between market counterparties and can be crucial to liquidity development in growth products.

Robin Martin, Head of Market Development, commented: “The introduction of RIBs into the LME membership structure is a really important development for the LME and may be particularly helpful in building liquidity for growth products such as our ferrous contracts. The proposed changes will enable RIBs to register trades directly into the matching system on behalf of clearing members via a dedicated portal, reducing administrative burden while bringing more business to clearing members.”

The LME is proposing to introduce a two-tiered membership structure for RIBs: tier 1 will be able to broker all existing LME products and required to hold the same amount of B shares and pay the same annual fees as existing Category 4 Members; tier 2 RIBs will be able to broker only a selection of growth products but will have no B-share requirements and a lower annual fee.

Other rule changes and consultation parameters

A number of other rule amendments for the LME and LME Clear are also being proposed as part of the Rulebook consultation. Responses to all proposals should be received by the close of business on 28 September 2018, with any resultant rule changes expected to take effect from the fourth quarter of 2018.